Jul 212016

Proper Portfolio Diversification 

Once upon a time a topiary artist invested all his money in shears and hedge funds. But he lost all of it because he wasn’t properly diversified. We diversify our assets so if one investment fails miserably it won’t drag down the rest of our portfolio with it. Owning 10 stocks is better than 1. But there comes a point when adding more stocks to a portfolio ceases to make a measurable benefit. Many experts suggest that optimal diversification is achieved when an investor holds 15 to 20 stocks spread across various sectors of the economy. 🙂


So if our portfolio contains 100 different stocks in 10 different industries then we are properly diversified right? Hold the mayo. I would argue no. Although we have a wide range of stocks and sectors, we really only have one asset class – stocks. Common stocks represent equity in publicly traded companies. But if a business becomes insolvent then its equity could be completely wiped out. This is why we have other asset classes such as bonds, which gives investors some recourse in a liquidation situation.

Okay, so diversification means having a balanced portfolio of index funds with both stocks and bonds right? Well, not quite. The capital markets can be highly volatile and it operates on a system that isn’t always reliable. In 1914 the US stock market shut down for 4 straight months. More recently in 2001 the NYSE was offline again for several days. This means at any time investors could be locked out of the market without warning. So other than financial assets, we can also invest in hard assets such as real estate, private businesses, gold, or other commodities. Over the past 2 decades Canada has gradually lowered interest rates and loosened borrowing rules, which encouraged consumer borrowing. This made the cost of living more expensive, especially in larger cities. But those who bought homes in Toronto circa 1996 and kept it until now would have seen their home prices rise to keep up with, or even surpass the inflation rate.

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Oct 012014

The American economy is starting to pick up. U.S. stocks have held steady in September. However the Canadian stock market dropped 4.3%, the price of oil fell $3 per barrel, and the value of the Loonie sank to just 89.4 cents U.S.

Thankfully my finances held up okay in September. I did lose about $5,600 of value in my stock portfolio though. 😐 It’s hard to make money when the entire stock market index takes a big hit. However I still managed to end the month with a net worth increase of +$1,400. This is largely due to my rental income which came at the end of the month. I deposited this payment of $5,177 into my bank account, same as this time last year. Unfortunately I’m still cash flow negative on my farmland investment by about $4K a year, but I’m hoping that the land will appreciate in value over time to compensate for any short term losses.


Phew, if it wasn’t for this payment I’m afraid my net worth would have dropped by several thousand dollars. 😕 But instead I eked out a small gain! I receive 2 rent payments annually from the farms; once in the spring and once in the fall.

What a coinkydink. 😉 Just as I experience a month of stock market decline my farmland investment pulls through for me. 😀 I decided to use the extra rental money to pay down some of my debt. I know my debt level might be a bit on the high side and many people have given me pretty strong signals to use less leverage. But for now I think I’m doing alright with over 6 consecutive years of double digit annual returns.

I’ve had a lot of time to experiment and reflect on my financial choices since buying a condo in 2009 and living by myself.  I’ve discovered what matters most is to be flexible and have a solid understanding of one’s unique financial situation. Understanding removes uncertainty and creates confidence, which will lead to a sense of control. I’m comfortable with my debt because I’m confident I have control over it. However it’s important to have a contingency plan as well, which I thoroughly stress test.

*Side Income:

  • Part-Time Work = $500
  • Dividends = $400
  • Farm Rent = $5,200
*Discretionary Spending:
  • Eating Out = $100
  • Others = $200

*Net Worth: (MoM)chart_14sept net worth graph economy slow down

  • Assets: = $836,000 total (3,900)
  • Cash = $3400 (+1200)
  • Stocks CDN =$88,700 (-5300)
  • Stocks US = $52,900 (-300)
  • RRSP = $49,000 (+500)
  • MICs = $15,000 (same)
  • Home = $254,000 (same)
  • Farms = $373,000 (same)
  • Debts: = $525,700 total (-5,300)
  • Mortgage = $196,900 (-400)
  • Farm Loans = $204,800 (-400)
  • Margin Loan CDN = $27,500 (-2200)
  • Margin Loan US = $24,900 (+700)
  • TD Line of Credit = $31,000  (-1000)
  • CIBC Line of Credit = $11,600 (-400)
  • HELOC = $18,500 (-100)
  • RRSP Loans = $10,500 (-1,500)

*Total Net Worth = $310,300 (+0.45%)
All numbers above are in $CDN. Conversion rate used: 1.00 USD = 1.12 CAD

I hold mostly dividend growth stocks in my margin accounts. They’re large-cap, blue chip companies such as Chevron, Starbucks, or Disney, with large economic moats and have a history of increasing earnings and dividends over time. Apparently the severe weather in the prairies this year has not deterred farm buyers 🙂 Alberta received a lot of snow. Saskatchewan and Manitoba experienced pretty bad flooding. Yet according to a Re/Max report land prices are still going up.

Land in short supply left “well-financed” Alberta farmers ready to make a deal on short notice, Re/Max said, noting tiled land, for example, sold for as much as $10,000 per acre in southern Alberta, up 20% over the previous year.

In Saskatchewan, prices increased from between $1,500 and $2,000 an acre in 2013 to between $1,800 and $2,200 in 2014. Manitoba saw its price range go from between $1,350 and $1,600 to $1,500 and $2,000.

My Saskatchewan farms are currently worth about $1,200 an acre on average. If we assume that report is accurate then even a conservative $100/acre increase would give me a solid $31,000 capital appreciation for this year alone. 😀 That alone would be more than enough to cover the entire cost of servicing my total debts, for which I pay about $18,000 of interest per year.

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Apr 262013

13_04_pewunevenrecovery wealthThe Pew Research Center released an interesting study recently. They looked at the change in average net worth in the US during the economic recovery from 2009 to 2011 and found out that despite America’s households growing their net worth by 14% during this time, the vast majority of Americans actually saw declines to their wealth. This is because the lower 93% of all households actually saw a decrease to their net worth on average. But the remaining Americans, (the top 7%) saw their wealth grow by 28% during the same time, which pushed the national average up. This made for a very uneven recovery where the affluent became richer 🙂 while the lower 93% of Americans experienced negative gains 🙁

How can we take advantage of this information? Well the study points to the “different performance of financial asset and housing markets” as the largest contributor to the opposite trajectories of the rich compared to everyone else. Rich households have 65% of their wealth in stocks, bonds, and retirement accounts while their home only accounts for 17%. But the average household have just 33% of their wealth in the markets, while 50% comes from their home. We all know that between 2009 to 2011, the financial markets (stocks, bonds, etc) rebounded from the recession, however US housing prices remained flat to negative. So the solution is simple. We just need to diversify our assets and not have most of our wealth tied up in our homes.

I have used this strategy with my own finances and from experience I can say it has worked brilliantly so far 😀 After I bought my home in 2009 I invested in other assets and benefited from much of the stock market gains. Today I have about $50K equity in my home, $80K in stocks, and $40K in farmland. Below is a pie chart breakdown.

13_04_equity_allocationThis is why I’m not a fan of paying down the mortgage when interest rates are low. If we make extra payments to get out of debt then we deny ourselves the opportunity to properly diversify our investments. And diversification, as the study points out, was how the top 7% got wealthier. Some people may argue it’s risky to invest while still in debt, but they don’t realize that it’s also risky to aggresively pay down debt and not diversify (^_-)  How fast we pay down our mortgage does not affect the price appreciation or future market value of our home when we sell it some day. But the profits and returns on our other investments like stocks, commodities, and maybe even a second property in the future, does depend on whether we buy them now or later because of course the earlier we invest the better (゜∀゜)  Canadian stocks have unfortunately underperformed in the last couple of years 🙁 And it looks like real estate is starting to cool off too. But due to strong soft commodity demand the average Canadian farmland value appreciated by 15% in 2011, and 19% in 2012. That’s why diversification is so important.  By spreading our investment seeds broadly we are better positioned to capture the overall growth of our economy no matter what happens in the future 😉 Isn’t learning about investing so much fun? (=^_^=) We don’t even have to be in the top 7% or have a crazy high net worth to use the same financial strategies as the rich do 😀